Market snapshot: the cavalry is finally arriving

US markets nudged higher on renewed optimism surrounding the economy, with both the S&P500 and Dow Jones finishing at record highs.

Comments from several Federal Reserve officials following last week’s 0.5% cut sought to justify the reasons behind the larger-than-expected reduction, pointing to a desire to sustain the current health of the economy now that inflation is almost under control.

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Meanwhile, new data revealed that the task is not yet finished, with a slight weakening in manufacturing activity and a rise in prices for goods and services suggesting that the genie is not yet back in the bottle. As such, Friday’s Personal Consumption Expenditures report will take on extra significance in estimating the current direction of travel for inflation.

Investors nonetheless remain hopeful that a soft landing may well be in sight, while also fully expecting a further rate cut at the next Fed meeting in November, where consensus is currently equally poised between another 0.5% cut or a slightly more conservative reduction of 0.25%. In any event, by that stage there will have been not only several data points to provide further colour on the state of the economy, but also the third-quarter reporting season will have shown whether the current levels of optimism and higher valuations are justified.

The fresh record closes add to the progress of the main indices in the year to date for the Dow Jones and S&P500, which are now ahead by 11.8% and 20% respectively, while the technology-heavy Nasdaq index is up by 19.7% and likely to be in particular focus as the new reporting season unfolds.

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In Asia, Chinese markets were boosted by the possibility that the cavalry is finally arriving. The authorities announced a raft of new stimulative measures, including a reduction of bank reserves and mortgage rates with the possibility of more to come, thus freeing up more capital for lending in an effort to prop up the ailing property sector. Of itself, the news is unlikely entirely to erase the investor apathy which has plagued the country over recent months, but is nonetheless a promising sign that the authorities have recognised the need for some sustained and measurable stimulus.

Chinese markets rallied by up to 3% overnight, although not yet enough to nullify the losses in the year to date, with the positive developments washing over to most other markets in the region. Japan’s Nikkei index continued its recent run, as investors have taken solace in comments from the Bank of Japan that it is not yet time to raise interest rates further, but that the bank will remain driven by the direction of inflation and then act if necessary.

UK investors were in a similarly buoyant mood, with the premier index continuing the resource-led momentum from yesterday’s session after the stimulus announcements from China overnight. The optimism spilled over to other stocks with a particular Chinese exposure such as Prudential (LSE:PRU) and Standard Chartered (LSE:STAN), while on its debut day as a FTSE250 constituent Burberry Group (LSE:BRBY) also saw the benefit of buying interest.

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Less positively, engineering company Smiths Group (LSE:SMIN) slid by 7% as a result of missing analyst expectations for both revenue and profit, despite posting an increase in both lines from the previous year.

Even so, the China effect was the dominant feature in opening exchanges, leading the FTSE100 to a gain of 7.2% in the year so far and edging closer to threatening the previous record level set in May. That milestone is now just 1.8% away, while the more domestically focused FTSE250 has added 6.3% this year as the UK has received renewed attention as an alternative and attractive investment destination.